Growth & ConvergenceEC4004 Lecture 3

Recap

Convergence

World Income

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Key EquationsSolow Growth Model

∆k/k= s· (y/k) − sδ − n–k is capital per worker

–y is real gross domestic product (real GDP) per worker

–y/k is the average product of capital

–s is the saving rate

–δ is the depreciation rate

–n is the population growth rate.

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Production function

y = A · f (k)

Solow Growth Equation

∆k/ k= s A· f( k)/k − sδ − n

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k* = k*[ s, A, n, δ, L(0) ]

(+) (+) (−) (−)(0)

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One of the most important questions about economic growth is whether poor countries tend to converge or catch up to rich countries.

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Convergence and Transition Paths for Two Economies

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Economy 1 starts at capital per worker k(0)1 and economy 2 starts at k(0)2, where k(0)1 is less than k(0)2.

The two economies have the same steady-state capital per worker, k*, shown by the dashed blue line.

In each economy, k rises over time toward k*. However, k grows faster in economy 1 because k(0)1 is less than k(0)2.

Therefore, k1 converges over time toward k2.

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y= A· f( k) and ∆y/y= α·(k/ k)

∆k/k was higher initially in economy 1 than in economy 2.

Therefore, ∆y/y is also higher initially in economy 1. Hence, economy 1’s real GDP per worker, y, converges over time toward economy 2’s real GDP per worker.

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Growth Rate vs Level of Real GDP per person for a group of countries

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Growth Rate vs Level of Real GDP per person for the OECD Countries

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Growth Rate vs Level of Income per Person for US States, 1880--2000

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Conditional convergence:

a lower k(0) predicts a higher ∆k/k, conditional on k∗.

Absolute convergence

the prediction that a lower k(0) raises ∆k/k without any conditioning is called.

www.gapminder.org

086 399 83 06

QuestionsAn increase in the depreciation rate affects the steady-state

capital per worker the same way as an increase in the population growth rate.

T/F?

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World growth data reveals that from 1960 to 2000:

a. the US and other OECD countries stagnated.

c. some countries particularly East Asian countries grew at low or negative rates.

b. sub-Saharan African countries grew at low or negative rates.

d. all of the above.

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Next Time

Micro Models-> Macro ModelsRead Barro Chapters 4 & 5